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Reckitt - agrees to sell Infant Child Nutrition China

Sophie Lund-Yates, Equity Analyst | 7 June 2021 | A A A
Reckitt - agrees to sell Infant Child Nutrition China

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Reckitt Benckiser Group Plc Ord 10p

Sell: 6,206.00 | Buy: 6,207.00 | Change 22.00 (0.36%)
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Reckitt has agreed to sell its Infant Child Nutrition Business (IFCN) in China, for $2.2bn. The group will retain an 8% shareholding in the business. The group expects to incur tax costs of around £300m and transaction and other costs of around £200m. Including these, Reckitt believes the deal will generate cash proceeds of around $1.3bn, which will be used to pay down debt.

The group will continue to own the Mead Johnson and Enfa brands.

Because of the sale, Reckitt expects to generate a £2.5bn net loss. That reflects a revaluation of the value of IFCN assets, and charges relating to the amount Reckitt originally paid for the business.

The deal should complete in the second half of this year, but is subject to approval from Reckitt's works council in the Netherlands.

The shares were unmoved following the announcement.

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Our View

Reckitt's portfolio of brands includes Lysol and Dettol, and in the current environment, that's working pretty well.

The group's first quarter results suggest heightened hygiene awareness could stick, which would make for a long-term revenue bump in the Health and Hygiene division (79% of group revenue). Sales growth of just 4.1% doesn't sound like much, but when you consider the fact that Covid-related pantry-stocking began this time last year, any growth at all is impressive. Compared to 2019 levels, revenues are up more than 17%.

The pandemic added wind to Reckitt's sales just as it was looking for ways to propel sustainable, long-term sales and profit growth. Digital marketing has lowered the barriers to entry for launching a new brand, leading to an influx of market-share-stealing smaller companies and fierce price competition.

Reckitt's solution is a £2bn investment in improving and sharpening its proposition. Deep pockets should give the group an edge- cooking up superior products is what supports brands' premium price tags, which should ultimately underpin margins. Reckitt seems to be making genuine headway on improving supply chains and stock availability already - both crucial if you want to grow sustainably.

The group's also offloading the Scholl brand and buying a US pain killer company. These deals make sense to us, and highlight Reckitt's efforts to streamline its focus. We think all these actions are good moves, but turning a machine of Reckitt's size around takes time, and comes with execution risk.

We must admit we're relieved to see the Chinese Infant Child Nutrition business has been given the boot. While the sale doesn't come as a huge surprise, given the previously announced strategic review, it's a welcome decision. There's no getting away from the fact this was a major strategic hiccup on Reckitt's front, with the net proceeds of £1.3bn a tiny fraction of what the group paid for the business. It will mean another - hopefully final - round of painful impairment charges relating to the division.

Net debt is still a little higher than we'd like, at 2.4 times underlying cash profits, but this isn't unmanageable. It's also being helped by the excellent work being done on working capital, which helps free cash flow.

The pandemic means Reckitt items are a must have in households all over the world, and we're genuinely impressed by the turnaround progress so far. The priority now is keeping the turnaround spinning so Reckitt can harness the momentum the pandemic's provided, and make the most of what could be a long-term opportunity. That's a big task, and we can't rule out ups and downs along the way.

Reckitt Benckiser key facts

  • Price/Earnings ratio: 20.2
  • 10 year average Price/Earnings ratio: 19.0
  • Prospective dividend yield (next 12 months): 2.7%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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First Quarter Results (28 April 2021)

Like-for-like (LFL) revenue at Reckitt rose 4.1% to £3.5bn for the first quarter, reflecting strong volume-driven growth in Hygiene. Pandemic-related pantry stocking began in the first quarter last year, making this year's comparisons unflattering. Compared to 2019, LFL revenue was up more than 17%.

Increased investment in e-commerce over the past year meant online sales were 24% higher, making up 13% of overall revenue.

2021 guidance was unchanged with LFL revenue growth expected to be 0 - 2% for the year. The group also expects a 0.4 - 0.9 percentage point reduction in underlying operating margins.

Strong volumes and improved pricing meant LFL revenue in Hygiene (47% of revenue) rose 28.5% to £1.6bn. Lysol, Finnish and Air Wick had strong performances, particularly in North America where 'stay at home' dynamics continued to boost demand.

LFL revenue in Health (32% of revenue) fell 13% to £1.1b, due to a 14.2% volume decline. Sales of Dettol were stable and remained elevated compared to pre-pandemic levels. Double-digit revenue growth for Durex was the result of a strong performance in China where social distancing restrictions have eased significantly since the same period in 2020. An exceptionally weak cold and flu season meant the group's over-the-counter portfolio reported a near 40% decline.

Nutrition (21% of revenue) continued to struggle with LFL revenue down 7.4% to £742m. Lower birth rates in most markets meant volumes were down 8.6% and promotional spend in China partially offset price/mix improvements.

The group's medium-term outlook of mid-single digit organic revenue growth, and a mid-20's margin by the mid-2020s, is unchanged.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.